Insurance problem recast as optimal portfolio
Problem 1. Suppose w of initial wealth, an investor has access to asset that pays
v per unit but only in state 1. The asset costs p per unit. 1 and 1
1 are the
probabilities of the states. U = ln (W ) : How ma

SCHOOL OF ECONOMICS
FACULTY OF ARTS AND SOCIAL SCIENCES
ECOS3022
The Economics of Financial Markets
Semester 1 , 2014
Unit Coordinator: Oleksii Birulin
Email: oleksii.birulin@sydney.edu.au
Office: Merewether 361
Tel: 90365047
Consultation times: TBA
Class

Faculty of Arts and Social Sciences
School:
Economics
Department/Program:
Unit of Study:
ECOS3022 Economics of Financial Markets
Session:
S1 2015
U nit of Stu d y O u t line
Unit Coordinators
Unit coordinators are listed on undergraduate and postgraduate

Term 1 2015
ECOS3022
Guillaume Roger
University of Sydney
Exercise set 6 dynamics
Consider a T -period economy with a single good and two types of agents
(i = a, b). They have the same utility function
u = ln x0 +
T
t E[ln xt ], t = 1, 2, ., T
t=1
where

Term 1 2015
ECOS3022
Guillaume Roger
University of Sydney
Application/Exercise #4: Finance economy.
Uncertainty and spot nancial markets
Consider an exchange economy with two periods (t = 0, 1), 1 good as in class
and S states in the second period so S +

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Term 1 2015
Ecos3022
Guillaume Roger
University of Sydney
Practice exercises; set #3
These are tutorial, or practice questions, for you to familiarise yourself
with the concepts that we use. Think of them as drills, or scales on the
piano: they are useful

T HE E CONOMICS OF F INANCIAL M ARKETS
R. E. BAILEY
Solution Guide to Exercises for
Chapter 15 Futures markets II: speculation and hedging
1. A company seeks to reduce the price risk associated with acquiring 1,000 barrels of oil ten
months from the prese

Options: Denitions
Call option: a security that gives its owner the right, but not the
obligation, to purchase a specied asset for a specied price, known
as the exercise price or the strike price.
Put option: a security that gives its owner the right, but

Forward and futures contracts
Forward contract: two parties agree today to take a future action
Example: seller agrees to deliver a specied
good(asset) at a
specied place on a specied date; the buyer agrees to take delivery
and to make payment.
Payment t

Arbitrage
Arbitrage is the process by which investors seek to make risk-free
gains (positive payos) with zero initial outlay.
All the actions that investors take to secure gains without committing
any capital and without bearing any risk.
Arbitrage portfo

1
Problem set 2 solutions/portfolio frontier in mean
variance approach
Problem 1. Consider assets with returns as in the matrix below
assets
1 3
states
9 5
Suppose the states are equally likely. Derive the ecient portfolio frontier p ( p ) .
Calculate the

T HE E CONOMICS OF F INANCIAL M ARKETS
R. E. BAILEY
Solution Guide to Exercises for
Chapter 12 Bond markets and xed interest securities
1. Dene the yield to maturity on a coupon-paying bond with n years to maturity. Hence, explain
why the concept of yield

Econ 3022
Lecture 5: introduction to General
Equilibrium.
Some background material
February 18, 2016
Econ 3022
General equilibrium
Why?
Econ 3022
General equilibrium
Trade involves exchange.
Who buys? Who sells?
How are prices determined?
How is a consume

Term 1 2016
ECOS3022
Guillaume Roger
University of Sydney
Exercise set 5 interest rate and CAPM
These may take a while and some effort but you have all the necessary material in the class notes.
Question #1: impatience and interest rate
Consider a two-per

Term 1 2016
ECOS3022
Guillaume Roger
University of Sydney
Exercise set 1
Part #1: Differentiation, maxima, minima
1. Differentiate and evaluate the derivatives for the following functions :(a) f (x) = 3x2 , x = 1, x = 2
(b) f (x) =
3
x2
x = 1, x = 2
(c) f

Term 1 2016
ECOS3022
Guillaume Roger
University of Sydney
Exercise set 2
Part #1: Differentiation, maxima, minima
1. Find the maximisers of the following functions; check the second-order
conditions. Where needed specify the domain on which you may find
a

Term 1 2016
Ecos3022
Guillaume Roger
University of Sydney
Practice exercises
These are tutorial, or practice questions, for you to familiarise yourself
with the concepts that we use. Think of them as drills, or scales on the
piano: they are useful to get

ECOS 3022
Some basic finance
February 18, 2016
ECOS 3022
Basic finance
Content:
Compounding and discounting
Annuities and mortgages
Pricing bonds
ECOS 3022
Compounding and discounting
You must have heard of the time value of money.
Later in the course wel

ECOS 3022
Lecture 4: introduction to dynamics.
Insuring, lending and borrowing
February 18, 2016
ECOS 3022
Insuring, lending and borrowing
Why?
ECOS 3022
Intertemporal smoothing and insurance
I presume that you mostly studied static problems like
max u(x)

ECOS 3022
Decision making under uncertainty
February 18, 2016
ECOS 3022
Decision making under uncertainty
Content:
Uncertainty
Expected utility
Risk aversion
Assumed knowledge:
Preference ordering
Basics of probability theory
ECOS 3022
Uncertainty
Our new

ECOS 3022
Economics of Financial Markets
ECOS 3022
February 18, 2016
ECOS 3022
Outline of the course
This course is a rigorous introduction to the economics of
financial markets, that is, of the economic logic that underpins
the pricing of securities in W

ECOS3022
ECOS 3022: Lecture 3
February 18, 2016
ECOS3022
Optimization with inequality constraints
Content:
the constraint set
Lagrange multipliers
ECOS3022
Constraint set
So far we have work on problems of the form
max u(x)
xX
s.t.
px=M
where the constrai